4. Issues Addressed by
• What causes prices to rise?
• How does being a part of a global
economic system affect nations’
• Can government policies be used to
improve economic performance?
5. Long-Run Economic Growth
–Rich nations have experienced
extended periods of rapid economic
–Poor nations either have never
experienced them or economic
growth was offset by economic
6. Increased Output
• Total output is increasing because of
increasing population, i.e. the number
of available workers.
• Increasing average labour productivity:
the amount of output produced per unit
of labour input.
7. Rates of Growth of Output
• Rates of growth of output (or output per
worker) are determined by:
– rates of saving and investment;
– rates of technological change;
– rates of change in other factors.
• Recession is the downward phase of a
business cycle when national output is
falling or growing slowly.
– Hard times for many people
– A major political concern
• Recessions are usually accompanied
by high unemployment: the number of
people who are available for work and
are actively seeking it but cannot find
11. The Unemployment Rate
• The unemployment rate can stay high
even when the economy is doing well.
• After eight years of economic growth, in
2000, the unemployment rate in Canada
was near 7%.
• When prices of most goods and
services are rising over time it is
inflation. When they are falling it is
• The inflation rate is the percentage
increase in the average level of prices.
13. Effects of Inflation
• When the inflation rate reaches an
extremely high level the economy tends to
function poorly. The purchasing power of
money erodes quickly, which forces
people to spend their money as soon as
they receive it.
14. The International Economy
• An economy which has extensive trading
and financial relationships with other
national economies is an open economy.
An economy with no relationships is a
18. The Exchange Rate
• The trade balance is affected by the
exchange rate: the amount of Canadian
dollars that can be purchased with a unit
of foreign currency.
19. Macroeconomic Policy
• A nation’s economic performance
– natural and human resources;
– capital stock;
– economic choices made by citizens;
– macroeconomic policies of the government.
21. Budget Deficits
• The economy is affected when there are
large budget deficits: the excess of
government spending over tax collection.
22. Budget Deficits (continued)
• The large budget deficits of the 1980s
and early 1990s are unusual.
– Borrowing from the public might divert
funds from more productive uses.
– Federal budget deficits might be linked to
the decline in productivity growth.
27. Economic Theory
• Economic theory: a set of ideas about
the economy to be organized in a
• Economic model: a simplified
description of some aspects of the
28. The Classical Approach
• The invisible hand of Economics:
General welfare will be maximized (not
the distribution of wealth) if:
– there are free markets;
– individuals act in their own best interest.
29. The Classical Approach
• To maintain markets’ equilibrium – the
quantities demanded and supplied are
– Markets must function without impediments.
– Wages and prices should be flexible.
33. The Keynesian Approach
• The government can purchase goods and
services, thus increasing the demand for
output and reducing unemployment.
• Newly generated incomes would be spent
and would raise employment even further.
34. Evolution of the Classical-
• After stagflation(persistent high inflation
combined with high unemployment and
stagnant demand in a country's economy.
• ) – high unemployment and high inflation –
of the 1970s, a modernized classical
• Substantial communication and cross-
pollination is taking place between the
classical and the Keynesian approaches.
35. Unified Approach to
• Individuals, firms and the government
interact in goods, asset and labour
• The macroeconomic analysis is based on
the analysis of individual behaviour.
36. The Unified Approach
• Keynesian and classical economists
agree that in the long run prices and
wages adjust to equilibrium levels.
• The basic model will be used either
with classical or Keynesian
assumptions about flexibility of wages
and prices in the short run.